There are two important terms to understand regarding one’s payroll and paychecks: net pay and gross pay.
Payroll can become a challenging task regardless of the size of your company.
Each employee might receive separate payment amounts, be subject to different deductions, and be subject to different compliance requirements.
One of the first steps in determining your business’s budget, accurately processing payroll, and calculating taxes are understanding the difference between gross pay and net pay.
What is gross pay?
The aggregate of money one’s employees receive before taxes and deductions, is known as gross pay.
Whenever a job is announced, the offered salary is usually stated as gross pay.
This is also known as base salary, and it does not include any long-term or short-term incentives or benefits.
What is net pay?
Net pay is the sum of money one’s employees receive after all deductions are made.
This is the income they receive on payday.
Payroll taxes, income taxes, retirement account contributions, health insurance premiums, wage attachments (garnishments), and other voluntary or mandatory subtractions are examples of deductions.
How to calculate: gross pay Vs. net pay
The method used to calculate gross wages is heavily influenced by the way an employee is compensated.
For hourly or wage workers, multiply the hourly pay or wage by the total number of hours the employee worked in a pay period.
For salaried employees, subtract the annual salary from the total count of pay periods within a year.
If the employees are compensated monthly, then there are 12 pay periods. Similarly, weekly will have 52 pay periods and biweekly will have 26 pay periods.
Once you’ve calculated an employee’s gross pay, calculating their net pay is simple.
Whether working with a salaried or hourly employee, net pay can be calculated by using the formula: Net pay equals gross revenue minus all deductions and taxes.
FICA payroll taxes, health insurance premiums, income taxes, and retirement contributions are all examples of deductions and taxes.
The key difference between gross pay and net pay
The items deducted are the primary distinctions between gross and net pay:
Gross pay is the total of an employee’s wages, reimbursements, commissions, and bonuses for a given pay period.
Whereas, net pay is defined as gross pay minus all payroll deductions such as taxes, benefits, and mandatory garnishments.
The take-home pay of an employee is referred to as net pay. Since net pay encompasses deductions from gross pay, gross pay will almost always be greater than net pay.
Employers who are familiar with these 2 terms are very often more suitably equipped to negotiate wages with employees and run payroll efficiently.
An employee’s pay stub must always include the amount they earned throughout a pay period that is, gross pay, and a line-by-line breakdown of their deductions as well as the actual quantity of the paycheck, that is, net pay.
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